A member (the “donor”) of a Catholic church in Texas was an ardent supporter of churches in her native country that were experiencing persecution. Fearing that direct contributions to these churches would be confiscated by the government, the donor wired money to the personal bank account of her cousin. The cousin then transferred the money to selected Catholic churches in that country. Other than her membership in a Catholic church, the cousin did not have any formal role with any other Catholic institutions in that country. During 2006, the donor wired $25,000 to her cousin’s account pursuant to her plan and claimed these transfers as charitable contributions on her tax return for that year.
The donor also claimed a charitable contribution deduction for the cost of an airplane ticket ($1,000) that she purchased in 2006 to travel to her native country and provide services to Catholic churches in that country. While she informed the pastor of her home church in Texas of the nature of her trip, she was not working in any official capacity for her church while engaged in rendering charitable services to Catholic churches in her native country.
In 2007, the donor became a member of a tax-exempt organization that supported the work of missionaries in her native country.
The IRS audited the donor’s 2006 tax return, and denied a charitable contribution deduction for any of the wire transfers to her cousin, and for the cost of the airline ticket. The donor appealed to the Tax Court.
The Court’s ruling. The Tax Court noted that the donor bore the burden of proving that she was entitled to the claimed charitable contribution deductions. It concluded that she failed to demonstrate the deductibility of any of the disputed charitable contributions.
The donor argued that her wire transfers were deductible charitable contributions since the ultimate beneficiary of the transfers was the Roman Catholic Church, a qualified charitable organization. The court disagreed, noting that section 170(c)(2) of the tax code defines a “charitable contribution” as a contribution or gift “to or for the use of” an organization “created or organized in the United States…or under the law of the United States.”
The donor cited the case of Winn v. Commissioner in support of her position. In that case a federal appeals court upheld the deductibility of a contribution to a fund established by three Presbyterian churches for the support of a particular missionary, even though the contribution mentioned the missionary’s name, since the contribution was “for the use of” an exempt missions organization. The court noted that a church officer received donated funds and distributed them for the mission work the church intended. The IRS, in a private letter ruling, explained this case as follows:
At issue was a contribution in response to an appeal by a church to assist a certain person in her church missionary work. Central to the court’s finding was that even though the contribution was made payable to a fund named for the individual, an officer of the church took the funds donated and dealt with them as the church wished. That is, possession of the contribution by a church official was held to be one of the elements establishing control by the church. The court concluded, “We also note that a donor can earmark a contribution given to a qualified organization for specific purposes without losing the right to claim a charitable deduction. Such a contribution still would be to or for the use of a charitable entity despite the fact that the donor controlled which of the qualified entity’s charitable purposes would receive the exclusive benefit of the gift. … Proof that the church sponsored the appeal for the express purposes of collecting funds for this part of its work, that an officer of that church took the funds donated and dealt with them as the church wished, and that the funds went to the support of the work the church intended is sufficient to establish that the funds were donated for the use of the church.” IRS Letter Ruling 200530016 (2005).
The Tax Court noted that the Winn case differed from the present case:
[The donor] did not make the wire transfers to or for the use of an organization created or organized in the United States or under the laws of the United States. Her contributions were made to her cousin, who distributed them for the benefit of foreign Catholic churches. Therefore, her wire transfers of $25,000 are not deductible as charitable contributions.
The donor argued that the Catholic Church is a universal organization, and therefore Catholic churches in foreign countries are qualified charitable contribution recipients. The court disagreed: “[We have] no basis to find that the Catholic churches in that foreign country to which the donor’s wire transfers were sent were created or organized in the United States or under the laws of the United States.” The court added that “the language of section 170(c)(2) is explicit, and this court must follow such plain language.”
The donor’s airfare
The donor claimed the cost of her airfare as a deductible unreimbursed expense incurred in the performance of services to a qualified charitable organization. The court acknowledged that a taxpayer is permitted to deduct unreimbursed expenses made incident to the performance of services to qualified charitable organization, and noted that such expenses include transportation expenses and reasonable expenses for meals and lodging while away from home.
The court, in denying any deduction for the donor’s airfare, noted that she “had failed to show that any of the Catholic churches in the foreign country to which she rendered services was a qualified charitable organization.”
The donor also claimed that she was performing missionary services on behalf of her local Catholic church and diocese while overseas. But the court noted:
Her local diocese did not have control over her services provided to the Catholic churches in the foreign country, and no legally enforceable trust or similar legal arrangement existed between her local church (as a member of that diocese) and the donor. She did not render services in the foreign country under the direction of, or to or for the use of her local church or the local diocese. The record shows only that her priest at her local church had some awareness of her work in her native country. Nor is there any evidence that she provided those services during the year in controversy to or for the use of the [US-based missions agency] of which she did not become a member until 2007. Anonymous v. Commissioner. TC Memo. 2010-87 (2010).
Relevance to church leaders. This case is important for two reasons.
(1) contributions to foreign charities
Church members sometimes make contributions directly to religious organizations or ministries overseas, or to a United States religious organization for distribution to a foreign organization. Are these contributions tax-deductible? As the Tax Court noted in this case, the tax code specifies that a charitable contribution, to be tax-deductible, must go to an organization “created or organized in the United States or in any possession thereof.” In addition, the organization must be organized and operated exclusively for religious or other charitable purposes. This means that contributions made directly by church members to a foreign church or ministry are not tax-deductible in this country.
A related question addressed by the IRS in a 1963 ruling is whether a donor can make a tax-deductible contribution to an American charity with the stipulation that it be transferred directly to a foreign charity. The IRS ruled that such a contribution is not deductible since in effect it is made directly to the foreign charity. Revenue Ruling 63-252.
KEY POINT. In its 1963 ruling the IRS did concede that contributions to a U.S. charity are deductible even though they are earmarked for distribution to a foreign charity, so long as the foreign charity “was formed for purposes of administrative convenience and the [U.S. charity] controls every facet of its operations.” The IRS concluded: “Since the foreign organization is merely an administrative arm of the [U.S.] organization, the fact that contributions are ultimately paid over to the foreign organization does not require a conclusion that the [U.S.] organization is not the real recipient of those contributions.”
The fact that church members cannot claim a charitable contribution deduction for transfers to foreign charities in no way implies that a church cannot make such distributions. Churches can distribute their resources in furtherance of their tax-exempt purposes, even if this means transferring funds to a foreign charity. Individual donors, on the other hand, are confronted with the requirement of the tax code that their charitable contributions must go to a qualified charity (a term that excludes foreign charities).
KEY POINT. You may be able to deduct contributions to certain Canadian and Mexican charities covered under an income tax treaty with those countries. To deduct your contribution you generally must have income from sources in those countries. In addition, you may be able to deduct contributions to certain Israeli charitable organizations under an income tax treaty with Israel. To qualify for the deduction, your contribution must be made to an organization created and recognized as a charitable organization under the laws of Israel. The deduction will be allowed in the amount that would be allowed if the organization was created under the laws of the United States but is limited to 25 percent of your adjusted gross income from Israeli sources.
The court noted that the US-based charity with which she associated in 2007 was a qualified recipient of charitable contributions, but none of her disputed contributions were made to that charity.
(2) deducting unreimbursed charitable travel expenses
This case also addressed the question of whether church members can claim charitable contribution deductions for travel expenses they incur on short-term missions trips in foreign countries. The court, in denying any deduction for the donor’s airfare incurred while traveling to a foreign country to perform missionary services, noted that “she did not render services in the foreign country under the direction of, or to or for the use of her local church or the local diocese.” Her local priest was aware of her work, but her work was not under his direction.
The court also noted that her missionary trip overseas was not at the direction of the U.S.-based charity with which she associated in 2007, and therefore her travel expenses were not tax-deductible.
This article first appeared in Church Finance Today, July 2010.